How Inflation can wipe out your savings, debt, and Bond investments - At the same time!
I talked about Inflation in a previous post, but, in essence, you can think about it as a decrease in the value of one unit of currency.
For example, if there was a lot of inflation on the euro because the central bank printed more money, then, after some time, each euro will be worth a lot less.
Your Savings and Debt
If the currency you use the most experienced a lot of inflation, as is expected to happen with most fiat in the next few years, due to the COVID emergency spending, some things would happen:
If you had $10k in savings and the USD, for some reason, dropped in value, you would still have $10k, but that money would buy a lot fewer things.
This means that, essentially, your savings would have less value! This is why most Economists fear hyperinflation.
At the same time, if you had to pay back a $5000 loan, that money would also be less valuable and, thus, easier to acquire, leading to a practical decrease in your debt.
This might seem good, but, it really isn't, because it also means that your 'safe' investments are worth less money:
Investments in Bonds
Finally, fixed-income investments, like Bonds, are negatively impacted by inflation.
Just like personal debt, bonds, (government and corporate debt sold to investors), would be less valuable and, therefore, give you a smaller real income.
Protection against Inflation
If these scenarios sound bad to you and you want to insure yourself from the worst, here are a couple of options:
Commodities' values don't depend on inflation, as such, if the value of the dollar halves, their price would double, keeping their real cost the same.
In the past few years, crypto has been seen as pretty safe from fiat inflation, due to its dissociation from government currencies.
Minor inflation is important to keep modern economies working because it incentivizes spending and investing, but too much of it is defensibility bad for everyone!
Are you protected against inflation? Let me know in the comments!
Thanks for reading!
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Take a look at my last posts, about Investments!
- Take advantage of Shorting! - What really is Shorting and how Investors can use this tool
- Portefolio Diversification - Why it's so important and how it works!
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